A great misconception about the FX market is that pricing is competitive and transparent. That might be true for the big institutions and hedge funds, but not for businesses involved in global trade. Recent research by the European Central Bank on pricing of OTC derivatives illustrates that the majority of non-financial FX participants pay up to 25 times more to hedge their FX exposure than the most active, sophisticated firms. The report concludes that banks treat a small group of select clients favorably, while engaging in systematic price discrimination on businesses they deem to be captive or unsophisticated.

The researchers from the aforementioned study focused on a dataset of more than half a million EUR/USD FX forward contracts traded between 204 banks and over 10,000 large multinational to small import-export companies.

Just has uncovered extensive discrepancy in Norwegian corporate FX pricing

At Just, we agree with the findings from the ECB study and see that they correlate strongly with what we are seeing in the Nordic market.

We assess the pricing of our customers’ trades against the best rates we find quoted on the market, and we observe trends across  multiple industries, dozens of currency pairs, and two years of historic data. Typically we find that the rates quoted by banks to Norwegian corporates are marked up significantly compared to the true market rate, with major and unaccountable variance in markup between companies.

Our most sophisticated customers trade with an average markup of around NOK 200 per million. However, others may trade with markups in excess of NOK 2,000 per million. This margin is typically not disclosed - it is normal for margin to be quietly applied to the quoted rate by the bank’s sales desk. Banks themselves typically trade at costs below NOK 30 per million, so it is clear that there is significant profit for banks baked in to corporate FX transactions.

Unfairness in the market

Margin variance across corporates does not correlate with the size of FX flow of those companies, which tells us that this is a matter of price discrimination rather than economy of scale. Adding further strength to this observation, Just customers have successfully negotiated with their banks to bring down their margins. For some companies, this translates to savings of millions of NOK annually.

We also see regional differences in pricing across the Nordics, which in some cases means that subsidiaries of the same company incur wildly differing markups depending on the country they trade in. What is clear is that corporates need to become increasingly aware of their choice of bank and trading strategy in order to avoid being disadvantaged by a highly opaque market.

Helping corporate treasurers access fairer pricing

Fortunately, there is an easy solution for businesses that care about being treated fairly and saving on cost. As the researchers note in their study, having access to benchmarks has the potential to significantly reduce price information asymmetry, and thereby also reducing the risk of being discriminated against.

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